Contents
Understanding the Importance of Earnings in Stock Performance
Earnings are often considered the most critical figure in a company’s quarterly financial report. While investors and analysts pay attention to various metrics and insights from management, the earnings per share (EPS) number serves as a clear indicator that helps cut through the noise. It’s not just about the actual earnings; it’s also about how those results compare to expectations.
When a company exceeds or falls short of its bottom-line projections, this can have a significant impact on its stock price, particularly in the short term. This dynamic has led many investors to seek out opportunities around earnings surprises. The key is identifying companies that are likely to beat their earnings estimates, which can create favorable trading opportunities.
What is the Zacks Earnings ESP?
One tool that has gained popularity for identifying potential earnings surprises is the Zacks Expected Surprise Prediction (ESP). This system focuses on the most recent analyst earnings revisions, as these are typically more accurate than older estimates. The reasoning is that analysts who update their forecasts closer to the earnings release date likely have access to more up-to-date information.
The calculation of the Zacks ESP involves comparing the Most Accurate Estimate with the Zacks Consensus Estimate. The percentage difference between these two numbers gives the ESP value. When combined with a Zacks Rank of #3 (Hold) or better, stocks have historically shown positive earnings surprises approximately 70% of the time. Additionally, this strategy has delivered an average annual return of about 28% over a 10-year period.
Understanding Zacks Ranks
Most stocks fall into the Zacks Rank #3 (Hold) category, which means they are expected to perform in line with the broader market. Stocks ranked #2 (Buy) and #1 (Strong Buy), representing the top 15% and 5%, respectively, are anticipated to outperform the market. Among these, Strong Buy stocks tend to show the highest level of outperformance.
Evaluating Potential Investment Candidates
To illustrate how the Zacks Earnings ESP works, let’s look at a few examples. Dynatrace (DT) currently holds a Zacks Rank of #3 (Hold) and is set to report its next quarterly earnings on August 6, 2025. Its Most Accurate Estimate is $0.38 per share, while the Zacks Consensus Estimate stands at $0.37. This results in an Earnings ESP of +1.46%.
Similarly, Salesforce.com (CRM) is also a Zacks Rank #3 (Hold) stock. It is scheduled to report earnings on August 27, 2025, with a Most Accurate Estimate of $2.78 per share. The Zacks Consensus Estimate for CRM is $2.77, leading to an Earnings ESP of +0.23%. Both DT and CRM have positive ESP values, which may indicate the potential for positive earnings surprises.
Finding Opportunities Before Earnings Reports
Investors looking to capitalize on earnings surprises can use tools like the Zacks Earnings ESP Filter. This feature helps identify stocks with the highest probability of delivering positive or negative surprises before their earnings reports. By leveraging this data, traders can make informed decisions about when to buy or sell a stock during earnings season.
Using such tools effectively requires a deep understanding of market dynamics and the ability to interpret analyst forecasts accurately. However, with the right approach, investors can enhance their chances of making profitable trades around earnings announcements.
